The Rise of Innovation in Asia

Asian countries are no longer just a place to get cheap labor or programming skills. Innovation is on the rise. A report from the Harvard Business School Asia Business Conference.

by Sean Silverthorne

Although Asian countries have been able to use cost advantages and software coding prowess to attract outsource business from around the world, the region is quickly moving up the value chain to challenge America's leadership in innovation.

Or, as HBS professor Warren McFarlan put it, researchers in the U.S. may soon have as much to fear about losing their jobs to overseas competitors as call center employees do today.

Executives debated "The Present and Future of Innovation in Asia" during the 2005 Asia Business Conference held on February 19th at Harvard Business School.

A recent survey of 200 mostly Fortune 500 companies found an "irreversible process" of traditional white-collar jobs being sent to Asia, said Arie Lewin, a professor and director of the Center for International Business Education and Research (CIBER) at the Fuqua School of Business, Duke University. CIBER sponsored the study, which will be released on April 16th.

Among the preliminary findings is that most companies are not deterred by security or intellectual property concerns when considering outsourcing moves to Asia, Lewin said. The survey also found that the factors driving offshoring started with the need to find software smarts to prepare for Y2K, but now include a shortage of qualified, technically trained people in the States.

India favored

Respondents said they are likely to send work to the following countries: India (69 percent); China (8 percent); the Philippines (5 percent); Latin America (5 percent); Eastern Europe (4 percent); and the Caribbean/Mexico (2 percent).

More and more, Lewin said, the work being outsourced goes beyond call centers and similar services to include research, HR functions, and engineering services. He expects organizations to create Web-based organizational structures that will help them compete globally.

We have moved from 'manufactured in China' to 'designed in China.'— John Deng, Vimicro

Pramathesh Rath, India's consul general in New York, emphasized that India is quickly moving up the value-added chain, citing design work done in the country on Apple's iPod and plasma TVs.

The great brain drain from India in the 1990s was stemmed after the dot-com bubble burst at the end of the last century, Rath said. Much of that talent has now returned to India and is being used to grow India's contribution in pharmaceuticals, telecom, and software. Ideas, manpower, and money add up to tremendous innovation occurring in the country right now, he said.

John Deng, CEO and president of Chinese chipmaker Vimicro, said his company is proof of Chinese innovation. Vimicro holds some 400 patents and is the world's leading supplier of PC camera processor chips. "We have moved from 'manufactured in China' to 'designed in China,'" he said.

Lessons from memory

Certainly the United States has no lock on innovation, panelists suggested. Technology is the great leveler, the powerful ingredient that can catapult a company, an industry, and even a country to the head of the class almost overnight, said Kiyotaka Fujii, president and CEO of SAP Japan Co., Ltd. That lesson was learned by Japan in the 1980s, when it was rising to prominence in some segments of the semiconductor industry, such as memory. But Japan grew complacent and was soon eclipsed by Korean companies using technology to leapfrog to the front of the pack, said Fujii.

Panelists noted that countries in the region are doing a large amount of business with each other, helping the region grow more powerful. Japan has been the largest investor in China over the last two years, spending not only on a potentially huge customer base, but also as a source of cutting-edge manufacturing, said Dhananjaya Dvivedi, senior managing executive officer of Shinsei Bank.

HBS professor McFarlan said it is clear that Asia has benefited from the Internet's ability to send work—including highly-skilled work—easily around the globe.

"Asia is competing in the global technology-enabled game," he said. That means U.S. researchers will soon have as much to fear from this trend as call center employees have in the recent past.